Many on the Street left General Electric (NYSE:GE) and GE stock for dead. But it appears that both are in the midst of a comeback in the short-term and should be very well-positioned over the longer term.
Since hitting a 52-week low of $6.66 last month, GE stock has jumped nearly 30%. Key to the rebound of GE stock has been reduced fears about GE’s financial health. These fears have been lowered by several recent developments.
Last month, GE began preparing for an initial public offering of its healthcare unit, Bloomberg reported. The news service estimated that the unit would have an enterprise value, including debt, of $65 billion to $70 billion. Also in December, research firm Vertical Research Partners upgraded its rating on GE stock to “buy,” saying that the risk of the company being hit with a liquidity crisis had diminished.
And on Jan. 7, Bloomberg reported that private equity firm Apollo Global was lining up financing for a bid on GE’s jet-leasing unit. The unit could be valued at up to $40 billion, wrote Bloomberg, which quoted JPMorgan as saying that the deal could generate gross proceeds of $8 billion to $10 billion for the troubled conglomerate,
And according to the news service, research firm William Blair wrote that the market’s view of the risk facing GE stock could greatly diminish if the company’s new CEO, Larry Culp, is able to generate cash through (in Bloomberg‘s words) “a big asset sale.”
Reduced Near-Term Risk for GE Stock
The debt and liquidity risks facing GE and GE stock are indeed starting to look manageable. If GE is able to clear $15 billion from the healthcare unit IPO, $9 billion from its jet-leasing sale, and $5 billion from the slated sale of its Baker Hughes stake, it will have raised $25 billion of cash. Suddenly, the $26 billion of bond payments that the company must make over the next two years doesn’t seem so steep.
Long-Term Green Shoots for GE Stock
Meanwhile, the problems that are afflicting GE’s Power unit look like they can be solved over the longer term.
First of all, as I’ve written multiple times in the past, it looks like electricity consumption, driven by the proliferation of electric cars and marijuana production, is going to increase meaningfully. And I’ve also written that, as electricity usage increases, utilities will have more money to buy more of GE’s products and more reason to do so, thereby boosting GEW’s results and GE stock.
It looks like there could be some validity to my prognosis. On Dec. 31, Bloomberg reported that, according to an estimate by the U.S. government, U.S. electricity usage had risen “almost” 2.3% in 2018. Bloomberg stated that this was “by far the biggest increase since 2010” and the news service cited electric cars as one of the possible factors behind the increase. It also cited greater use of air conditioning and increased use of electricity in heating and cooking as other possible reasons for the jump.
Another one of the bears’ arguments on GE stock, which I’ve also scoffed at in the past, also appears to have been incorrect. Specifically, bears have said that GE’s Power business has been doing badly because renewable energy, particularly solar energy, is causing natural gas use to drop rapidly. But in the U.S. in the first half of 2018, natural gas generated about 18% more electricity than in the first half of 2017. Similarly, globally, in 2017, natural gas generated almost 100 more terawatt hours than in 2016, the International Energy Agency has reported.
It actually looks like solvable, company-specific problems — not long-term trends — have been causing the poor results of GE’s Power business. Specifically, mechanical difficulties with GE’s turbines may actually have been what caused the unit’s woes. Culp’s decision to name John Rice, a retired GE vice chairman, to oversee the troubled unit, could very well help improve the division’s results.
At any rate, the owners of GE stock should be encouraged by the fact that unchangeable macro trends do not appear to have been the actual main cause of the unit’s struggles. They should also be pleased by Rice’s appointment and the encouraging macro data I cited above, as well as by Culp’s statement in November that the unit is “getting close” to a bottom.”
As I mentioned earlier, GE stock has rallied in recent weeks, as many on the Street have realized that the company isn’t going belly-up anytime soon. General Electric stock should jump much further in 2019, as Culp whips the company into shape, as its Power unit starts to benefit from positive macro trends, and as more investors realize that the iconic company’s days aren’t numbered.
As of this writing, the author did not own shares in any of the aforementioned securities.